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- Congress is sparring again over raising the debt ceiling, and time is running out to avoid a default.
- The ceiling caps how much the government can borrow, but it's turned into a political weapon.
- Here's what the debt ceiling is and why it's so dangerous for the US economy.
- See more stories on Insider's business page.
The clock is ticking toward a catastrophic, and unprecedented, default on the nation's debt, and Congress isn't doing anything about it.
Treasury Secretary Janet Yellen warned Speaker of the House Kevin McCarthy on Monday that the US could run out of money to pay its bill as early as June 1. Should Congress fail to act on that threat and not raise the debt ceiling, Americans could experience severe consequences — retirement savings would be depleted, mortgage and student-loan payments would surge, and it could trigger a recession that would cost millions of jobs.
But Republicans and Democrats have historically been at odds over the best way to avoid that outcome, and the country is now dangerously close to experiencing it if Congress doesn't act soon.
If that sounds familiar, you already know a fair deal about the "debt ceiling." If it doesn't, you don't know that every so often, Congress has to ask itself permission to pay America's bills, and roughly half of it usually doesn't want to. That's the "ceiling" that has to be raised.
In other words, each party is waiting for the other to blink first.
Behind America's ever-growing debt pile
The federal government relies on debt. It regularly spends more than it raises in taxes. To cover that cost, the Treasury Department borrows cash by auctioning bonds. That's why the government's debt pile exceeds $31 trillion.
The debt ceiling was introduced in 1917 to encourage the government to slow its borrowing. Reaching the limit forces one of two outcomes. Congress could raise the ceiling or temporarily suspend it and punt the problem into the future. Or the government could default on its debt.
Over the past 50 years, the government has raised it dozens of times. It's not hard to understand why. Defaulting on government debt could drag the country into an economic recession. Spending on critical programs would freeze. The dollar's strength would likely plummet. And financial markets would slide into uncharted territory as investors brace for an unprecedented economic catastrophe.
There's an even greater risk. The dollar is the world's reserve currency, meaning other governments depend on it holding its worth. A default on US government debt would dramatically shake that confidence. The dollar's value could plummet as the world financial system prices in a dollar that isn't reliable — or seeks an alternative.
The US has avoided this for as long as the debt ceiling has existed, but as it has steadily climbed higher, it's served more as a political weapon than a true threshold. Democrats and Republicans have both sparred over raising the ceiling, and their latest spat is no different.
The latest battle over borrowing
Since Republicans took over the majority in the House, the issue of raising the debt ceiling was brought to the table — but little progress has been made since. McCarthy and his GOP colleagues have been adamant that any debt ceiling raise should be tied to their own priorities, particularly in the form of spending cuts.
That stance was made clear in McCarthy's bill that passed the House last week, called the Limit, Grow, Save Act of 2023. It intended to raise the debt ceiling by $1.5 trillion, or until March 31, 2024, whichever happens first, and it would be accompanied by $4.5 trillion in spending cuts — including banning student-loan forgiveness, bolstering work requirements on welfare programs, and rescinding unspent pandemic funding.
But that's probably as far as the bill will go. Senate Majority Leader Chuck Schumer has called the legislation the Default on America Act, or DOA, and President Joe Biden vowed to veto it should it make it to his desk.
"Since the GOP refuses to level with America, @SenateDems are exposing how the Default on America (DOA) Act will crash the economy, raise costs, and kill good paying jobs," Schumer wrote on Twitter on Thursday. "Republicans' DOA Act has nothing to do with averting default and everything to do with the hard-right agenda."
Biden is set to meet with Schumer, McCarthy, Senate Minority Leader Mitch McConnell, and House Minority Leader Hakeem Jeffries on May 9, and a White House official previously told Insider the president intends to stay on his push for a clean debt ceiling increase, with no spending cuts attached, at the meeting.